Jurisdictional Competition Between State Arbitration Courts of the Russian Federation and Arbitration Tribunals

18.09.2000

General principles

According to art. 118 of the Constitution, justice in the Russian Federation
is executed only by courts. Legal authority is realized through
constitutional, civil, administrative and criminal court procedure. The
Russian legal system is based on the Constitution of the Russian Federation
and federal constitutional law.

The law “On the legal system of the Russian Federation” of 31 December 1996
makes no mention of arbitration tribunals as an element of the judicial
system. This approach reflects the Russian doctrine, which regards this
category of courts merely as an alternative method for the defense of
rights. The secondary character of arbitration tribunals consists, firstly,
in their limited application. This also concerns the status of the persons
capable of taking part in an arbitration tribunal hearing, and in the nature
of the matters that can, in principle, be referred to the consideration of
arbitration tribunals. Secondly, the defense of civil rights in an
arbitration tribunal may be realized only with the agreement of the parties
involved.

The main sphere of operations in an arbitration tribunal is the defense of
civil rights. Article 11 of the Civil Code of the Russian Federation
provides that defense of violated or challenged civil rights is carried out
in accordance with the jurisdiction established by procedural law, by a
court, an Arbitration Court or an arbitration tribunal. Russian legislation
does not contain a single act defining the status of arbitration tribunals
and their competence, including the matter of the comparative competence of
arbitration tribunals and courts of state jurisdiction.

At the same time it must be noted that certain categories of cases may lie
exclusively in the province of state courts, and any agreement reached by
the parties concerning an arbitration tribunal hearing, irrespective of how
it is made, must be deemed invalid. Thus, art. 29 of the Arbitration
Procedural Code of the Russian Federation sets out the general rules of
exclusive jurisdiction of cases subject to arbitration courts in the Russian
Federation, and art. 212 of the Arbitration Procedural Code defines the
competence of Russian arbitration courts applicable to the category of cases
involving foreigners, indicating, among other things, the right of such
courts to consider claims arising from an agreement which was to be carried
out on the territory of the Russian Federation, and claims for compensation
for damages to property, if the action or some other circumstance leading to
the claim for damages took place on the territory of the Russian Federation
(cl.3, 4).

The basic position of contemporary Russian legislation is the division of
the legislation on arbitration tribunals into that which is relevant to
“internal commercial arbitration” and “international commercial
arbitration.”

The order of the proceedings of “internal commercial arbitration” is
regulated by the Interim Provision concerning arbitration tribunals for the
resolution of economic disputes, which was affirmed by the Resolution of the
Supreme Soviet of the Russian Federation on 24 June 1992. The Interim
Provision applies in the delegation of discretion to arbitration tribunals
in economic disputes that fall within the jurisdiction of arbitration
courts. In such cases, there is the condition that referral to such an
arbitration tribunal demands that the parties in the dispute are Russian
residents and that neither side possesses foreign investments.

International conventions to which the Russian Federation is a signatory and
the Russian Federation’s Law “On international commercial arbitration” of 7
July 1993 apply in cases of “international commercial arbitration.” In this
instance, we are speaking of arbitration tribunals that examine disputes
arising from contractual and other civil-legal relations and occur during
the execution of external economic transactions, if the commercial
enterprise or at least one party is abroad or if one of the parties in the
case is an enterprise with foreign investments.

The fundamental singularity of arbitration tribunal examination of disputes
lies in the mandatory existence of an agreement by the parties to take the
dispute to the arbitration tribunal – in the form of an arbitration clause
or an arbitration tribunal entry. An arbitration clause envisages the
rejection by the parties of state court jurisdiction and opts for the
examination of possible disputes by an arbitration tribunal.

The significance and consequences of concluding an arbitration clause are
enshrined in international agreements (in the first place – the European
Convention on External Trade Arbitration 1961 and the New York Convention on
the Recognition and Implementation of Foreign Arbitration Decisions 1958).
The Russian Federation is a signatory to both conventions.

In accordance with the provisions of the conventions, Russian legislation,
including art.87 of the Arbitration Procedural Code of the Russian
Federation, recognizes the existence of an arbitration clause as one of the
reasons for refusing to consider a claim. As a compulsory condition for such
an action, this article envisages that the defendant should declare the
existence of an arbitration clause and to retain the possibility of
application to an arbitration tribunal.

The practice of both Arbitration Courts of the RF and arbitration tribunals
has resulted in quite specific approaches to the resolution of a number of
fundamental problems, connected with the correlation of the spheres of
competence of both arbitration courts and arbitration tribunals. Practice
has also given rise to the clear definition of the areas of competence of
“internal commercial” and “international commercial” arbitration.

The division of the spheres of competence of both types of courts in the
Russian Federation rests not only on basic factors connected with the
judicial nature of arbitration tribunals as a procedural form for the
defense of rights, but also the possible rivalry in a concrete case. Rivalry
occurs when the claimant applies to a state arbitration court of the Russian
Federation, and not an arbitration tribunal for the resolution of a dispute
concerning a contract containing an arbitration clause. In principle,
arbitration procedural legislation clearly indicates recourse to an
arbitration tribunal. Article 87 p.2 provides that the claim is rejected
“if there is agreement between the parties involved in the case concerning
the referral of the given dispute to an arbitration tribunal, and the
possibility of an application to an arbitration tribunal has not been lost,
and if the defendant opposing a hearing in a state arbitration court appeals
for the transfer of the case to an arbitration tribunal no later than his
first declaration concerning the nature of the dispute.” However, state
arbitration courts encounter a number of problems. In the first place, they
may have difficulty in establishing whether the parties made the right
choice if an arbitration clause does not make specific reference to the
official name of the court. In the second place, it is not quite clear how
to interpret the condition relating to the timely expression of disagreement
concerning the hearing of the case in a state arbitration court “not later
than his first declaration concerning the nature of the dispute”: does this
mean that it is possible to petition for the referral of the case for
resolution by an arbitration tribunal and at the same time raise objections
concerning the nature of the dispute in case the petition is denied, or
whether such objections can be declared at this stage. Moreover, it is not
clear what retaining the right to apply to an arbitration tribunal means.
Fourthly, does the arbitration clause reflect the fact of an agreement by
the parties to refer the dispute to a specific arbitration tribunal? In
examining these questions the courts should take into account that the
content of many arbitration clauses, including many untraditional ones, may
be conditional on the existence of either international agreements
specifying an arbitration tribunal order of resolving certain categories of
disputes, or optional clauses, recommended by chambers of commerce and
associations, or the practice of specific, constantly acting arbitration
tribunals. However, despite possible textual variations, a state arbitration
court may acknowledge the validity of an arbitration clause if it exists in
written form and its content shows that the parties reached a definite
accord to avoid state jurisdiction and turn the dispute over to an
arbitration tribunal.

The content of an arbitration clause and clarification of the intention
of the parties to refer the dispute to an arbitration tribunal

In the practice of the International Commercial Arbitration Court (ICAC) of
the Chamber of Commerce and Industry (CCI) of the Russian Federation shows
that in interpreting the text of an arbitration clause, it is necessary to
determine the genuine desire of the parties to refer the dispute to the
ICAC. It is also necessary to take into account the evidence provided by the
claimant as the basis of his position.

Let us illustrate with a concrete example.

The contract appended to the claim contained the following arbitration
clause: “In the case of disputes arising concerning the present agreement
and the impossibility of resolving them by amicable means, such disputes are
settled by arbitration. Arbitration may take place in Moscow in accordance
with the rules and procedures of the Chamber of Commerce. The decisions of
such arbitration will be binding for both sides.”

The ICAC decided that, on the basis of the Russian legislation in this
instance (The RF law “On international commercial arbitration”), the parties
must agree the order of the resolution of disputes, including indication of
a specific permanently acting arbitration body which is competent to examine
the relevant disputes, i.e. the arbitration clause, which is the result of
the common will of the parties, must be formulated clearly and
unambiguously.

An indirect indication that the parties did not reach agreement concerning
referral of the dispute to the ICAC could be the behavior of the defendant
who, being duly notified of the submission of the claim to the ICAC and the
date of the hearing, sent no written explanation concerning the case to the
ICAC and took no part in the proceedings i.e. took no steps to indicate his
willing submission to the jurisdiction of this body.

The ICAC constituted that the content and meaning of the above-mentioned
arbitration clause lies not only in that the parties preferred arbitration
to other forms of resolving the dispute, but also in that an arbitration
hearing, should it occur, must take place in Moscow according to the rules
and procedures of the Chamber of Commerce i.e. a concrete body. However, the
parties did not indicate either the name of the arbitration body, or
according to which rules and procedures of which concrete Chamber of
Commerce this dispute ought to be examined. Under these circumstances, the
ICAC decided that the arbitration clause included by the claimant and
defendant into their contract cannot serve as the legal basis for the ICAC
to exercise its jurisdiction in the dispute arising from the contract.

Furthermore, Moscow lacks an arbitration body, mentioned in the above
clause; therefore it cannot be implemented. This circumstance, in part, is
seen as the basis for considering the clause invalid in accordance with the
Convention on the Recognition and Implementation of Foreign Arbitration
Decisions (New York, 1958).

At the same time, if the claimant had applied to the ICAC of the Chamber of
Commerce and Industry of the Russian Federation in the case of an analogous
clause, and the defendant had objected to the substance of the claimant’s
demands but did not dispute the competence of the court, the ICAC would have
considered itself competent to examine the case.

The intention of the parties to refer disputes connected with the contract
to an arbitration tribunal without a specific indication of the name of the
latter may be due to general reasons. Among these one should include clauses
agreed between Russian firms and foreign firms, whose chambers of commerce
or arbitration associations have signed standard arbitration clauses. It has
often been indicated in literature that clauses of this nature are not
imperative in character but, on the contrary, may be regarded only as
recommendations. However, the content of some of them, and also the
experience of relations between the parties in the dispute, may indicate the
legitimacy of the claimant’s application to the ICAC of the CTI of the
Russian Federation.

For example, the Agreements on arbitration clauses concluded by the CTI and
the Italian Arbitration Association, the American Arbitration Association,
or, among the more recently emerged – Korean Commercial Arbitration Council,
contain a direct reference to the ICAC as the arbitration tribunal examining
claims in Russia.

Thus, if the claim is filed in Russia, the parties involved in the dispute
are a Russian firm and a firm of one of the above mentioned countries, and
the place where the dispute is to be examined is Moscow, then there may be
at least some grounds to claim at least indirect affirmation that the
parties had the intention of referring the dispute specifically to the ICAC
and not some other arbitration tribunal.

In certain cases, the question of the possible application to an arbitration
tribunal arose due to errors in the naming of an arbitration tribunal
abroad. A case in point is the Arbitration Institute of the Chamber of
Commerce of Stockholm. On occasions it is called “Arbitration in Stockholm”
or “the Arbitration Court of the Swedish Chamber of Commerce in Stockholm”
and so on. It can happen that the clause contains no indication in
accordance with what rules the hearing should take place, while the
Arbitration Institute of the Chamber of Commerce of Stockholm can be carried
out in accordance with its own rules, or others, for instance – UNSITRAL.
The practice of the Arbitration Institute can be classed as sufficiently
liberal towards possible inaccuracies in arbitration clauses. At least, at
the preparatory stage of the hearing, the Secretariat of the Institute works
to assist clarification of the intentions of the parties.

In a number of cases the claimant, ignoring the arbitration clause in the
contract, submits a claim to a state arbitration court of the Russian
Federation, indicating the impossibility of applying to an arbitration
tribunal because, according to him, the parties to the contract did not
reach final agreement as to which arbitration tribunal would examine any
dispute and under what rules. If the claimant has observed all the rules of
jurisdiction and cognizance stipulated by ch.3 of the Arbitration Procedural
Code and bearing in mind the observance of demands of ch.14 of the
Arbitration Procedural Code concerning the form, content and order of
presenting a claim, the arbitration court, in the absence of circumstances
set out in arts.107, 108 of the Code, accepts the application and prepares
to consider the case, and schedules the hearing.

In all the studied or similar cases, the claimant faces the problem of
proving that the parties had the intention and existence of an agreement,
expressed in a particular way.

The existence of an arbitration clause as a basis of rejecting a claim by
the State Arbitration Court of the Russian Federation

Another complex of problems arises when there is an arbitration clause and
the claimant lodges a demand with the state arbitration court of the Russian
Federation. Here, as we have already noted, one must bear in mind, firstly,
the stipulations in p. 2 art. 87 of the existence of an agreement between
the parties concerning the submission of the given dispute to an arbitration
tribunal, and secondly – the possibility of applying to such a tribunal. In
this instance the arbitration court does not in fact decide, and cannot
decide, the question of the competence of any arbitration tribunal to
examine the dispute between the parties to the contract. The arbitration
court must establish whether the subject of the dispute falls within the
sphere of the arbitration clause cited by the defendant, who disputes the
competence of the arbitration court, and consider the existence/absence of
the possibility of approaching a specific arbitration court, and to further
evaluate the relevant evidence submitted by the party. In other words, check
if there are circumstances due to which the claim should be rejected, if,
naturally, the defendant declared the existence of an arbitration clause and
lodged a request for the transfer of the dispute to an arbitration tribunal
no later than his first declaration concerning the substance of the dispute.

According to p.2 art.87, a defendant who objects to the hearing of the case
in a state arbitration court must lodge a petition for a denial of the
claim. There is a possible situation in which the claimant, prior to
applying to the State Arbitration Court of the Russian Federation has
already attempted to approach an arbitration tribunal, but was rejected on
the grounds that the court did not acknowledge the arbitration clause
contained in the agreement. In this instance the act of the arbitration
tribunal (secretariat or arbiters) serves as evidence that the claimant has
no possibility of obtaining an arbitration tribunal hearing.

It is more difficult when the claimant has not attempted to apply to an
arbitration tribunal. The content of art. 87 of the Arbitration Procedural
Code does not indicate that the claimant is bound to prove the impossibility
of an application to an arbitration tribunal. On the contrary, the problem
of denial of a hearing can arise only on the basis of a relevant application
by the defendant.

Experience shows that the simplest way for a defendant to receive
confirmation of the possibility of applying to an arbitration tribunal is to
query the secretariat of an arbitration tribunal concerning its practice in
resolving problems connected with competence, bearing in mind the content of
the arbitration clause in question.

The time for lodging objections concerning substance may be carried out
simultaneously with objections regarding the competence of the state
arbitration court. However, their text and content must be so worded as to
exclude any ambiguity in interpretation. Objections must contain clear
indication that, in the first place, the parties have excluded application
to state jurisdiction, secondly – the claimant can and should apply to the
chosen arbitration tribunal, thirdly – that the chosen arbitration tribunal
is competent to examine the given dispute, fourthly – the defendant applies
for a denial of the hearing in accordance with p. 2 art. 87 of the
Arbitration Procedural Code. It should be further noted that only in cases
where the state arbitration court refuses to satisfy the request for denial
and rules that the claim should be examined in substance, can the objections
expressed be regarded as applicable to the substance of the dispute.

The subservient significance of the arbitration tribunal order of
examination of disputes with regard to court hearings is demonstrated by the
legal power of the decisions reached by arbitration tribunals. Separating
out the independent problem of recognition and compulsory enforcement of
foreign arbitration rulings, it is necessary to examine two others: the
prejudicial nature of the decisions of arbitration tribunals and the
challengeability of their decisions.

Article 58 of the Arbitration Procedural Code of the Russian Federation
envisages the obligation of state arbitration courts to accept, without
checking and evidence, facts that have been established earlier by a legally
active ruling by a court with state jurisdiction, and equally that same
ruling (prejudiciality). As for rulings by arbitration tribunals, they may,
in certain circumstances, serve as the basis for closing the case in
accordance with art. 85 of the Arbitration Procedural Code of the Russian
Federation.

The decision of an arbitration tribunal is final and may not be appealed in
the ordinary course of events, as is envisaged by the Arbitration Procedural
Code of the Russian Federation. However, in accordance with art. VI of the
New York Convention of 1958, art. IX of the European Convention of 1961 and
arts. 35 and 36 of the Russian Federation Law on international commercial
arbitration, the decision of an arbitration tribunal may be revoked by a
court of the Russian Federation on the grounds and order established in the
Conventions and the Law.

What is the meaning of the independent nature of an arbitration clause?

In the practice of state arbitration courts and arbitration tribunals, the
problem of the so-called independent nature of an arbitration clause from
the other conditions of an agreement deserves special attention. One may
indicate a number of related problems, which arose primarily in domestic
practice before international commercial arbitration, and then before the
state arbitration courts of the Russian Federation.

Originally, the problem consisted in whether it could be considered that an
arbitration clause loses force if a contract is declared void. The tendency
of West European and American courts and arbitrations to recognize the
independence of the arbitration clause has found subsequent affirmation in
the practice of the ICAC.

Generalizing the practice of the ICAC on this issue, Professor M.G.
Rosenberg notes that an arbitration clause, which is part of an agreement,
should be interpreted as an accord independent of other conditions of the
agreement. Therefore, declaration of the agreement void does not mean that
the arbitration clause automatically becomes void (e.g. ruling of 17.11.94
on case No.493/1993 and of 25.01.95 on case No.451/1991).

At the same time, the ICAC complies with the direct requirements of the
Russian Federation’s Law on international commercial arbitration (p.1
art.16). A corresponding rule is contained in p.3 #1 of the Regulations of
the Arbitration Court of 1988. It is also envisaged by the Regulations of
the ICAC of 1994 (p.5 #1).

For example, the ICAC made such decisions in cases where, on the basis of
art. 45 of the Civil Code of the RSFSR 1964, it declared void agreements
concluded by Russian juridical persons prior to 3 August 1992 where the
order of signing was violated by Soviet organizations, set out in the
Resolution of the Council of Ministers of the USSR of 14 February 1978 “On
the order of signing of foreign trade transactions” (e.g. the decision of
25.04.94 on case No.184/1993).

A similar approach has developed with regard to cases concerning the
recognition of an agreement as terninated (abrogated). Furthermore, the
arbitration clause is preserved if the contract contains a stipulation about
its coming into force in future upon the emergence of a certain condition.
The admission that a contract has not been concluded does not nullify an
arbitration clause either.

At the same time, the practice of arbitration courts has produced a number
of cases in which an attempt was made to give an extended interpretation of
the independent nature of the arbitration clause. This occurred in cases
involving reassignment of rights. The foundation of the claimant’s position
in this case is the assertion that in the transfer of rights or the entry of
another party into the contract, the new party undertakes only material
rights and obligations, and a special agreement is called for to become
party to an arbitration clause.

The same thesis was applied in general courts in examining cases disputing
the rulings of arbitration tribunals and the enforced execution of their
decisions.

The content of Russian substantive and procedural law contain no premises
for the development of such a theory. International practice also originates
from the presumption of “automatic adherence” to an arbitration clause. For
instance, in commentaries on Swiss practice it is noted that courts
(arbitration tribunals) have traditionally examined the dilemma, should a
document concerning joining a contract or receiving rights concerning a
contract, contain some special indication regarding its extension to an
arbitration clause or whether the general statement of association with the
contract (acceptance of rights) presumes adherence to the arbitration
clause. In the opinion of most specialists, a general reference is
sufficient. This position is based on the circumstance that arbitration has
become an accepted method of resolving disputes in the international arena.
A number of authors state directly that reference to an arbitration clause
may be general in character and requires no concrete “reminder” of the fact
that the given document contains an arbitration clause: “Il faut mais il
suffit que la volonte d’incorporer l’autre document soit etablier par un
texte.”

In view of the dynamics of the development of international commercial law,
the Swiss Federal Court ruled on 17 January 1995, ATF 121 111 38b, that
arbitration clauses, which were not signed by all parties, are effective.

When Russian arbitration courts began to examine property disputes with a
foreign element, this problem was relatively new, and the practice of ruling
on such disputes was very unstable. However, existing differences were
finally overcome by the Resolution of the Presidium of the Supreme
Arbitration Court (No.1533/97 of 17 June 1997). The substance is as follows.

The firm B & R b.v.b.a. (Belgium) and the firm “Golubov & Tiagai PLLC (USA)
concluded an agreement ceding the right of claim, demand and debt according
to which the first firm ceded the second firm the right to claim payment of
700 thousand US dollars from the Open joint-stock company “Volgograd
Aluminum”, which the latter received from “B & R” b.v.b.a. on a loan
agreement dated 08.04.93.

The firm “Golubov & Tiagai, PLLC” in the person of the law firm “Legist”,
applied to the Volgograd regional Arbitration court with a claim against the
Open joint-stock company “Volgograd Aluminum” demanding settlement of the
debt.

On 28.10.96, the court refused to hear the claim, basing its decision on
part 2 of article 87 of the Arbitration Procedural Code of the Russian
Federation. An appeal instance on 13.10.97 left this decision unchanged.

The protest is accompanied by the indicated acts of court suggesting their
revocation and referral of the case to a court of the first instance for an
examination of the substance.

As can be seen from the materials of the case, the agreement between the
parties concerning the loan envisaged that any disputes arising from it
would be solved by amicable negotiations, and if amicable negotiations did
not resolve existing differences, the matter would be referred to the
Arbitration Institute of the Chamber of Commerce of the city of Stockholm in
accordance with the Regulations of this arbitration institution.

In submitting a claim to the Volgograd regional arbitration court, the
cessionary believed that the arbitration clause as an agreement by
the parties was a condition independent of the main contract, and had
not a material-legal character, but a procedural one, and therefore could
not be transferred to him via the cession agreement.

According to art. 384 of the Civil Code of the Russian Federation, the right
of the primary creditor passes to the new creditor in the same amount and on
the same conditions that existed at the time of the cession, if no other
procedure is envisaged in law or by the terms of the agreement.

An analysis of the indicated norm and the parties to the cession agreement,
which also concedes the right to make legal claims, allows us to draw the
following conclusions.

A petition to the court in defense of violated rights is one of the
constituent elements of the right of claim passed to the new creditor.

Retention of the earlier established procedure of settling disputes agreed
by the parties does not limit the rights of the cessionary and allows due
defense of the rights of the debtor.

Allowing for this, both arbitration court instances came to the reasonable
decision that the conditions mentioned in art. 384 of the Civil Code of the
Russian Federation, whereby the rights of the primary creditor pass to a new
one, may be extended to include the condition concerning the right of
selecting a specific form of arbitration to resolve disputes among the
parties to the agreement.

Proceeding from this, it must be acknowledged that the court justifiably
applied part 2 of article 87 of the Arbitration Procedural Code of the
Russian Federation, according to which the claim was refused a hearing in
observance of the demands indicated in this form of claims.

Qualification of relations between the parties as an influencing factor
in the dispute being examined

The question of rivalry between a state arbitration court and an arbitration
tribunal may surface in more complex situations, when the court is faced
with the question of determining the nature of the relations which gave rise
to the dispute, as a foreign trade transaction. Let us illustrate with the
following example.

A Russian Open joint-stock company concluded a General Agreement concerning
joint activity in realizing an investment project in Russia by a United Arab
Emirates’ firm and a jointly participating Russian Limited liability
company.

According to their agreement, the foreign firm, jointly with the Russian
LLC, undertook to arrange an international credit to the sum of 20.000.000
US dollars within four months of signing the General Agreement on the
condition that the Russian OJSC transfers the sum of 500.000 US dollars to
the firm immediately after the signing of the General Agreement as a deposit
to compensate the firm’ expenses in arranging the credit and also officially
give it15% of the OJSC shares after the credit is received.

The General Agreement contained the following arbitration clause. “If the
Parties cannot resolve all differences and disputes by way of negotiation,
they are within their rights to petition the Arbitration Commission in the
location of the legal registration of the Party, or the Arbitration
Institute of the city of Stockholm. The decision of the Arbitration
Institute of the city of Stockholm is final for both Parties.”

Soon after the signing of the General Agreement, the OJSC informed the firm
that it was unable to make the deposit in the time stipulated by the
Agreement due to financial difficulties. The firm, now acting independently,
without the LLC, agreed to a change in form and time of payment of 500.000
US dollars by the OJSC on conditions set out in Addition No.1 to the General
Agreement. This Addition provides the full responsibility of the OJSC for
the change in the time specified by art. 3.5 of the General Agreement. The
Limited Liability Company did not sign Addition No.1.

The OJSC signed Addition No.1 with a reservation disclaiming this
responsibility but, despite the lack of agreement on this given substantial
condition, transferred a sum equivalent to 500.000 US dollars to the account
of the LLC. The LLC, acting on instructions from the OJSC and the foreign
firm, carried out the transfer of this sum to the receivers as instructed by
the foreign firm, written confirmation of which was later presented in reply
to the claim.

In view of the non-presentation of the credit over four months from the date
of the signing of the General Agreement, the OJSC filed a claim against the
LLC with the first instance level of the State Arbitration Court of the
Russian Federation, demanding the return of 2.591.000.000 rubles – the ruble
equivalent of 500.000 US dollars.

The LLC, in full accordance with p.2 of art. 87 0f the Arbitration
Procedural Code, petitioned against the hearing of the claim. However, the
Arbitration Court decided in favor of the OJSC and ruled that the LLC must
pay the sum of 2.591.000.000 rubles. The appeals instance court issued a
Resolution upholding the ruling of the court of first instance, and rejected
the appeal.

The LLC appealed to the Federal Arbitration Court, which resolved to revoke
the above-mentioned rulings and the Resolution of the State Arbitration
Court, and returned the case for a new hearing to the same first level of
the same court, with the indication that “upon agreement concerning the
referral of disputes to an arbitration tribunal, the resolution of the
question concerning the existence (or absence) of an arbitration clause has
substantial meaning, and the court should therefore determine the genuine
will of the parties in deciding the jurisdiction of the disputes arising
from the execution of the General Agreement, evaluate the terms of this
Agreement in accordance with the provisions of art. 431 of the Civil Code of
the Russian Federation and thus decided the issue of the possible
examination of this case by the arbitration court of the city of Moscow.”

The State Arbitration Court, having examined the case again, denied the
defendant’s application to decline hearing the case and ruled that the LLC
should pay 2.591.000.000 rubles.

The fundamentals of the claimant’s objections to the defendant’s appeal,
which were supported by the decision of the State Arbitration Court, noted
the following. Firstly, there were inaccuracies in the naming of the
Arbitration Institute, indicated in the Addition to the given General
Agreement. Secondly, the claimant and the defendant bear joint liability
under Russian law, and the claimant has the right to file against any joint
parties. Thirdly, insofar as both claimant and defendant are Russian
residents, their dispute does not fall within the jurisdiction of the
European Convention on Foreign Trade Arbitration 1961 and cannot be examined
by a foreign arbitration tribunal.

Having taken this position, the State Arbitration Court did not take into
consideration either the nature of relations that caused the dispute, nor
the possibility of a realistic application to an arbitration tribunal.

The presumption of joint liability expressed by the State Arbitration Court,
based on Russian legislation, is possible only in a case where the State
Arbitration Court of the Russian Federation or a foreign arbitration
tribunal or a state court, as a result of a domestic collision norm, will
lead to a conclusion on the applicability of Russian substantive law. In the
given instance, arising from the content of the contractual relations and in
view of art. 166 of the Fundamentals of Civil Law, even the assumption of
the applicability of Russian substantive law is highly unlikely.
Furthermore, in order to resolve the procedural problem, the State
Arbitration Court resorted to the institution of substantive law.

With regard to inaccuracies in the arbitration clause, as we have noted
above, the court must examine the intention of the parties at the time of
the conclusion of the Agreement and evidence of the possibility of
application to a specific arbitration tribunal. As we have already
mentioned, the Arbitration Institute of the Chamber of Commerce of Stockholm
is fairly liberal towards the formulations of arbitration clauses concerning
its own name. Moreover, the expressed willingness of the defendant to
participate in an arbitration tribunal examination and further the
defendant’s queries to the Arbitration Institute concerning submitting the
case to its jurisdiction do not affirm the categorical decision of the State
Arbitration Court’s assertion that there is no real cause for application to
an arbitration tribunal.

Arbitration tribunal examinations of disputes and bankruptcies

A specific sphere of relations generating problems under examination is the
field of bankruptcies. Article 57 of Law of the Russian Federation “On
insolvency (bankruptcy)” of 8 January 1998 determines the results of a State
Arbitration Court’s decision concerning acceptance of an application
acknowledging a debtor bankrupt in the following manner. According to p.1
art. 57, “from the moment the Arbitration Court renders a ruling
accepting an application for the recognition of a debtor as bankrupt:

proprietary claims against the debtor may be presented only in compliance
with the procedure established by this Federal Law;

upon the petition of a creditor, proceedings on cases associated with the
recovery of monetary resources and other property from the debtor shall be
suspended. In such a case, the creditor has the right to present his claims
to the debtor in the order, established by this Federal Law;

the execution of executive documents on property claims is suspended…;

satisfaction of claims by the debtor’s participants – juridical persons
concerning apportionment of a portion (share) of the property of the debtor
may not be granted in connection with his withdrawal from the complement of
participants.”

The practice of bankruptcy in the Russian Federation and the corresponding
implementation of art. 57 of the Law shows that after determination of
acceptance of an application to recognize the debtor as bankrupt, there are
no legal impediments for further examination of proprietary claims relating
to the given debtor by State Arbitration Courts and arbitration tribunals.
At the discretion of the claimant (creditor), the case may be brought to a
decision and, if the ruling is in favor of the creditor, then the creditor’s
demands concerning the bankruptcy case shall be considered established.

With regard to demands that were not declared to a State Arbitration Court
or an arbitration tribunal before a decision is reached concerning
acceptance of bankruptcy filings, the order of such applications is
determined by legislation on bankruptcy, according to which they may be
examined only within the framework of the bankruptcy case.

With reference to our problem, this means that if there is a contract
containing an arbitration clause between the creditor and the debtor, the
creditor loses the possibility of applying to an arbitration tribunal.
Should a Russian or foreign arbitration tribunal accept such an application,
its ruling will not be enforceable in the usual order.

Disputes on forward contracts and the problem of subject jurisdiction

In recent years, disputes about forward contracts concluded by banks have
appeared in the practice of State Arbitration Courts in the RF and the ICAC.
The surfacing and the acuity of their examination was due significantly to
the August crisis of 1998. The specificity of futures transactions lies in
that the parties agree on the purchase of currencies with the execution of
deals in the future and implementation of mutual reckoning. At the same
time, the parties do not intend to transfer the basic assets of the
transaction and run the risk of unfavorable changes in the exchange rate.
The subject of the transaction is the payment of sums by one of the parties
on results of fluctuations of currency exchange rates on the money market.

In the course of examinations of such disputes in State Arbitration Courts
in Russia, the first question to arise was that of the legal qualification
of the relationships developing between the parties and the possibilities of
legal defense. Allowing for the purely speculative, wager character of the
relations determined by such transactions, and the absence of intent by the
parties to carry out certain economic activity, State Arbitration Courts
gradually began to qualify such transactions as a type of wager deals, bets,
subject to art. 1062 of the Civil Code of the RF.

In their turn, according to art. 1062 of the Civil Code of the RF, demands
arising from wager relations are not subject to legal defense (with the
exception of cases connected with fraud and breach of confidence). State
Arbitration Courts have refused to satisfy claims on this basis. This
approach finally found clear expression in the Resolution of the Presidium
of the Higher Arbitration Court of the RF (No.5347/98 of 8 July 1999).

The Presidium of the Higher Arbitration Court of the Russian Federation
examined the protest of the Deputy Chairman of the Higher Arbitration Court
of the Russian Federation concerning the decision of 22.04.98 and the
resolution of the appeals instance of 15.06.98 of the Arbitration Court of
the city of Moscow in case No.A-40-8795/98-60-121.

Having heard and discussed the report of the judge, the Presidium ruled as
follows:

The Moscow commercial bank “Moskomprivatbank" filed a claim with the
Arbitration Court of the city of Moscow against the commercial bank “Russky
Bank Razvitiya” [Russian Bank of Development] for 4681204 rubles, including
4402750 rubles of the basic debt on the results of the mutual credit on
conversion deals and 278274 rubles in penalties for delay in discharging
obligations.

The claim was refused in a ruling of 22.04.98, as the deals concluded by the
parties come under the definition of wagers and, consequently, the demands
of the claimant were not subject to legal protection under art 1062 of the
Civil Code of the Russian Federation.

The appeals instance ruled on 15.06.98 to leave the decision in force for
the same reasons.

The protest of the Deputy Chairman of the Higher Arbitration Court of the
Russian Federation calls for the revocation of the named court acts and for
the return of the case for a new examination in the court of the first
instance.

Having examined the protest, the Presidium found no reason to satisfy it.

As can be seen from the materials of the case, the MCB “Moskomprivatbank”
and the CB “Russky Bank Razvitiya” concluded General Agreement No.110 of
24.03.97 “On the general conditions of the completion of currency conversion
transactions and the allocation of inter-bank credits on the internal and
external currency markets of the Russian Federation” (hereinafter – the
Agreement). On the basis of this Agreement the parties, through the medium
of exchanges of documents by electronic communications concluded 17
conversion transactions (on the purchase and sale of currency) on conditions
of “estimated (indexed) forward” with discharge dates 16, 19, 26 February
and 4, 5 March 1998.

In accordance with p.3.2 of the Agreement “forward” type transactions are
deemed to be conversion operations whose date of execution lags behind the
date of conclusion of the transaction by more than two working days. The
subject of estimated – forward contracts without the right of refusal is
defined by the Agreement as “the transfer of the difference between the
ruble/dollar exchange rate of the Moscow Inter-Bank Currency Exchange and
the ruble/dollar rate stipulated in the concluded contract.”

As can be seen from the conditions of the Agreement, the parties did not
envisage carrying out actual transfers of the basic assets of the
transaction in cases of disputed deals.

Calculations on transactions were to be carried out in rubles in the sum of
the difference between the value of the basic currency assets at an
originally fixed rate and its value according to the rate determined at a
future period (transactions of difference).

In view of this, the arguments of the protest that the parties, in cases of
dispute, were obliged to carry out actual transfer of the currency sold with
simultaneous agreement of mutual reckoning of counter obligations is not
consonant with the materials of the case.

In concluding disputed transactions, the parties undertake the risk of
unfavorable fluctuations in the currency rate for one or the other side. The
subject of the transaction is the payment of sums by one of the parties on
the outcome of currency fluctuations in the rate of exchange.

The materials of the case lack proof that the given transactions were
concluded by at least one of the parties having any kind of economic aim
(insurance of risks in currency contracts, investments, etc.).

Acting legislation does not regulate the above-mentioned transactions and
contains no indications of offering them legal protection.

Therefore, the courts were justified in their conclusion concerning the
applicability of art. 1062 of the Civil Code of the RF to deals of this
nature. In accordance with this article, claims by natural persons and
juridical persons concerned with the organization of games and wagers or
participation in them are not subject to legal protection, with the
exception of persons participating in games or wagers under the influence of
fraud, coercion, threat or malicious agreement of their representative with
the organizer of the game or wager, and also claims indicated in p.5 of art.
1063 of the Code.

Insofar as none of the indicated circumstances providing for legal
protection were confirmed by the materials of the case, legal instances
justifiably refused to satisfy the claim.

In view of the above, and acting in accordance with articles 187-189 of the
Arbitration Procedural Code of the Russian Federation, the Presidium of the
Higher Arbitration Court of the Russian Federation:

Ruled that:

The decision of 22.04.98, the resolution of the appeals instance of 15.06.98
of the Arbitration Court of the city of Moscow on case No.
A-40-8795/98-60-121 should remain unchanged, and the protest unsatisfied.

Thus, the participants of the relations examined cannot receive defense in
Russian arbitration courts. In our opinion, the provisions of art.1062 of
the Civil Code of the RF are of an imperative nature and must be applied in
cases where the parties have consented, in their agreement, to the
application of foreign law. In other words, the application of norms of
foreign law is impossible in view of art.158 of the Fundamentals of civil
legislation.

The problem that arose was not limited by the practice of RF arbitration
courts only. Many agreements between banks contained arbitration clauses
envisaging the submitting of all disputes to the ICAC of the Chamber of
Trade and Commerce of the RF. The practice of the examination of cases by
the ICAC did not become established at once. The problem of including
disputes of this kind into the jurisdiction of the ICAC was resolved
positively, including in connection with the factor that arbitration clauses
determined the competence of the ICAC quite adequately. For example, “all
disputes, differences or claims arising from the present Agreement, or in
connection with it, including those relating to its execution, breach,
abrogation or invalidity, are subject to resolution in the International
Commercial Arbitration Court of the Chamber of Trade and Commerce of the
Russian Federation in accordance with its Rules. The arbitration hearings
must take place in Moscow. The ruling is final and binding on the Parties.”

At the same time, acknowledgement of this competence of the ICAC produces
another problem. Can an arbitration tribunal defend claims from transactions
that are wagers by nature. The answer to this question is related, first and
foremost, to the necessity for the ICAC to analyze the real nature of
relations between the parties as established by the agreement. If the ICAC
decides that the agreement concluded by the parties is by nature a wager,
then what could be the motives for providing or refusing legal defense.

To a significant degree, the answer to this question was contained in the
former practice of the ICAC, which was not concerned with the examination of
conversion transactions. It dealt with claims relating to the recognition
and transformation of legal relations i.e. claims aimed at the ascertainment
of the civil rights and obligations of the parties. In its rulings, the ICAC
noted that a number of norms in the Civil Code of the RF envisage the direct
right of the court to make decisions which go on to raise issues of the
civil rights and obligations of the parties. For example, in accordance with
p.4 art.451, in exceptional cases concerning substantial changes in
circumstances, the court may rule for changes in the conditions of an
agreement. The Civil Code of the RF (p.1, art.11) envisages directly that
the Civil Code interprets the term “court” as not only state bodies (general
jurisdiction courts and State Arbitration Courts) but also arbitration
tribunals. Thus, the provisions of the Rules of the ICAC correspond to the
demands of the Civil Code on this matter. This is why it is impossible to
agree with a point of view that the norm of sub-paragraph 3 of p.1 art.8 of
the Civil Code of the RF, which envisages the arising of civil rights and
obligations from a court ruling does not apply to arbitration tribunals,
including the ICAC (even should there be consent of the parties on this
question). It should also be noted that the champions of this point of view
are probably not taking into account that in the case of consent by the
parties, the applicable sub-paragraph would not be sub- paragraph 3 of p.1
art. 8 of the Civil Code of the RF, but sub-paragraph 1 of the same
paragraph, which concerns the arising of civil rights and obligations from
agreements and other transactions that, while not envisaged by the law, do
not contradict it. The basis of such reasoning is, among other things,
art.446 of the Civil Code of the RF, according to which the conditions of
the agreement over which the parties entered into dispute (when they have
consented to hand the dispute over to examination by a court) are determined
in accordance with the decision of the court which, in accordance with the
law – and we stress this point again – may be an arbitration tribunal.

This fair approach of the ICAC also extends to relations in transactions of
a wager type. Insofar as demands connected with a wager are not, by law,
subject to legal defense, arbitration tribunals also may not provide legal
protection in view of p.1 art.11 of the Civil Code of the RF.